For years, consumers could take on short-term installment debt and multiple loans across different providers without it showing up on credit reports and with no impact on their credit scores.
But now that the Fair Isaac Corporation (FICO) has expanded its FICO Score 10 Suite to incorporate BNPL data, users of credit providers such as Klarna, Afterpay, PayPal’s Pay Later, and Affirm can expect their BNPL conduct to matter just as much as credit card behavior going forward.
“The downside is that BNPL misuse will now hurt borrowers in ways it didn’t before,” IncomeInsider.org research director Liam Hunt told NTD. “Missing payments, for example, on a $200 purchase could impact your ability to get a mortgage.”
FICO announced the new credit scoring index on June 23.
Because of the score, borrowers who are in the habit of paying back their BNPL loans in a timely manner can look forward to being recognized for a positive track record.
“The upside is visibility,” certified financial planner Andrew Latham told NTD. “Using BNPL responsibly can now help your credit. But late payments are common, and now they come with consequences.”
The difference from credit cards is that many BNPL services don’t charge interest if payments are made on time, while credit card companies largely charge interest either immediately or eventually.
Most BNPL firms require customers to set up automatic repayments through their debit card, credit card, or checking account. On average, the CFPB found that borrowers defaulted on two percent of their BNPL loans.
“I’m surprised FICO didn’t do this sooner,” CardRates.com consumer finance expert Erica Sandberg told NTD. “Credit scores help businesses such as lenders to accurately determine risk. To do that, they need to understand how a consumer has been borrowing and repaying money.”
FICO did not respond to requests for comment. FICO B2B Scores vice president and general manager Julie May said in a press release that Buy Now, Pay Later loans are playing an increasingly important role in consumers’ financial lives.
The fact that FICO developed a score for BNPL loans indicates they recognize that BNPL behavior is fundamentally different from traditional credit usage, according to Hunt.
“The biggest advantage is that responsible BNPL users who were formerly ‘credit invisible’ can now build credit history,” Hunt added. “I see this moving us toward a ‘total credit picture’ where all forms of consumer credit are tracked, rather than just traditional banking products.”
